Corporate Governance in the GCC - Euromoney

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will slow down the decision-making process and therefore hinder theirgrowth and development,” says Vink.Those that have watched corporate governance codes being introducedin other geographical regions argue that this could scarcely befurther from the truth, and that good corporate governance can feedpositively through to companies’ bottom lines. At an OECD Roundtableon Corporate Governance for Banks in Saudi Arabia, held in May 2007, apresentation delivered by the UK Company, Global Governance ServicesLtd, listed a number of benefits that companies can derive from goodcorporate governance. These include higher market values; betteraccess to capital; cheaper access to capital; higher credit ratings; anenhanced corporate reputation and improved abilities to deal with riskand scandals.Others express caution, however, about the linkage between goodgovernance and positive side-effects such as improved credit ratings.“To assume that a company can be upgraded exclusively on the basis ofgood governance is misleading,” says Amra Balic, governance analyst atStandard & Poor’s in London. “Governance is just one of a wide range offactors that we take into account when assigning a rating.”Nevertheless, a number of market participants insist that a range ofbenefits springing from good governance are not merely hypothetical.Dr Khaldoon Sorour is CEO of the recently-established Forsa Investmentsin Saudi Arabia. Half Saudi and half Lebanese, Sorour previouslyworked for Alliance Bernstein in London, and his experience has taughthim that investors are prepared to put a quantifiable value on goodcorporate governance practices. “Institutional investors in western marketshave been prepared to pay premiums of anything between 10%and 40% for companies in regions like the Middle East and Russia whichhave demonstrably better governance standards in terms of their readinessto provide transparent information,” says Sorour, who believes thatmuch still needs to be done to improve corporate governance acrossthe region. “The GCC has certainly improved and I think standards arehigher than they are in countries like Russia or the Philippines,” he says.“But we are still nowhere near where we should be.”For their part, a growing number of leading GCC companies are reportingthat they too have seen empirical evidence suggesting that highquality corporate governance can generate palpable, quantifiable benefits.One good example is provided by Kuwait’s largest listed company,Mobile Telecommunications Company (MTC), which now has consolidatedrevenues in excess of $2.7bn and more than 32m active customerslocated throughout the Middle East and North Africa. MTC says thatit believes “effective corporate governance will in the long term improveour performance, thus benefiting all stakeholders and ultimately servingthe public interest.” The benefits of implementing a well-developedcorporate governance policy, MTC adds, are “tangible”. “For example,” itsays, “rating agencies now look at corporate governance practices, andcompanies with sound practices, such as full financial disclosure andacross-the-board corporate transparency, can benefit from lower borrowingcosts. This was evident in MTC’s case….when financial institutionsprovided the company with [a] $2.4bn bridging loan in May 2005to [support] our acquisition of Celtel.”MTCMTC is one of the international success stories of the Middle Eastbusiness and industry. Founded in 1983 as a Kuwaiti mobile phoneservice provider, it has grown substantially in recent years to thepoint where it operates in 14 countries in Africa and five in theMiddle East, including Jordan and Kuwait where it is the dominantoperator.The company, which now has more than 13 million customers, has aclearly defined strategy of expansion both by winning new licencesand by acquisition, it has bought the Dutch company Celltel, whichhad a widespread base in many parts of Africa. It has financed itsexpansion prudently and efficiently.Corporate governance in the GCC: why is it needed?
Capital inflows: the impactof foreign direct investmentFDI is a key reason why it will become increasingly important for the oil-producing nations of theMiddle East to forge closer links with international investors and improve their corporate governancestandards.This is the growing recognition throughout MENA that even thewealthiest countries in the region will need to encourage more ForeignDirect Investment (FDI) if they are to guarantee economic prosperityfor future generations who may not be the direct beneficiaries of highoil prices.Already, a drive by GCC governments to open a number of key sectorsto regional and international private sector investors has prompted astriking rise in FDI flows into the Gulf. According to figures published byNBK, FDI inflows into the GCC rose from a very modest $378m in 2000 to$6.6bn in 2003, $12.6bn in 2004 and $20.1bn in 2005, with NBK reportingthat total FDI is estimated to have expanded by a further 20% in 2005.“Even with robust regional demand… the local manufacturing industry acrossthe Middle East has remained small and fragmented as compared to otheremerging economies due to its dependence on oil revenues”According to a recent report published by the Dubai-based private equitygroup, Abraaj Capital, one of the most formidable challenges nowfacing Middle Eastern as well as South Asian governments is the needfor job creation. “With 65% of the population under the age of 25, theMiddle East has the fastest-growing labour force in the world, growingat an estimated 3% per annum until 2020,” notes the Abraaj report.“By one estimate, the Middle East must create 80 million new jobs overthe next 15 years and almost 100 million new jobs by 2020 if it wantsto improve on the current unemployment rates – a near doubling oftoday’s total employment.”The commodities sector alone will be unable to absorb more than amodest proportion of the demand for new job opportunities as youngand increasingly aspirant people enter the labour force. To satisfy thatdemand, the Middle East in general and the GCC in particular recognisesthat it will need to attract investment into manufacturing industry,which it has failed to do during previous economic booms. “Evenwith robust regional demand,” advises Abraaj, “the local manufacturingindustry across the Middle East has remained small and fragmentedas compared to other emerging economies due to its dependence onoil revenues. The manufacturing sector contribution to real GDP hasremained constant at approximately 11% since 2000.”In recent years, the UAE has been at the forefront of the FDI revolution,attracting inflows of $4.26bn in 2003, $8.4bn in 2004 and $12bn in 2005.Saudi Arabia, however, has also seen a surge in FDI volumes in recentyears, with inflows mushrooming from just $778m in 2003 to $4.63bn in2005, according to the NBK data.Impressive though they may be, those figures will need to continue torise if the GCC region is to attract the investment it needs to upgradeits infrastructure. Specifically, according to a bulletin published recentlyby Abraaj Capital, over the coming decade regional infrastructureinvestment will include $188bn to be spent on transportation and ports,$155bn on power and utilities, $130bn on water, $87bn on petrochemicals,$49bn on healthcare and $18bn on education.According to NBK, only 35% of the projects that are now on the drawingboard in the Middle East are being implemented purely by governmentsponsors. That will mean that the local and international private sectorwill be required to shoulder the burden for a colossal flow of investmentinto the region’s infrastructure. Those investors teaming up with localjoint venture partners will only be able to do so with confidence if theyare assured of the best international corporate governance practicesamong regional companies.
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